View full sizeRachel Stark/The OregonianMolalla City Council will hear Wednesday night a report from forensic auditor Tiffany Couch detailing the city's misuse of system development charges. State law requires the city pay back the misspent funds within one year of discovery.

The forensic auditor Molalla hired to scour the books this month found the
city has misused system development fees for years. According to Oregon law, the city will have one year to repay the misspent $2.5 million.

It is unclear, however, where the city will find the cash.

Molalla's total adopted budget is $15.9 million, much of which is reserved for specific uses.

Couch said the city used system development charges -- fees paid by
contractors and used to pay for roads or other public improvements -- to finance
projects that were not in the city's capital improvement plan, a violation of
the law.

In addition, Couch's investigation hints that the violations were no
accident.

"It appears there was some knowledge they were using some funds for
unauthorized purpose, based on my interviews with other employees," Couch said.
"I have emails from 2009 from concerned constituents contacting the city and the
auditor saying we need to look into this."

Molalla's money shortage came to light after City Manager Ellen Barnes, the former city
administrator for Gold Beach, took office in October. She replaced John Atkins,
who resigned in April after four years on the job. Tensions with council
contributed to his decision, he told The Oregonian.

In an interview on Friday, Atkins said he would be "very surprised if an audit showed there was any misuse or misappropriation of SDC funds, particularly since SDC projects need to be approved by City Council."

Today, Barnes said she had not seen Couch's final investigation report. "We don't know at this point in time what the
city's options are," she said.

Couch said she will suggest to council tomorrow that they seek help from a
lawyer.

"As far as where they go from here, that's not up to me," the
auditor said. "They'll have to deal with the state of Oregon and legal counsel
as to what their options are."

"I feel sad for them."

In January, Barnes told council they had six months to avoid a deficit in order
to comply with Oregon law.

Errors racked the city's books, she told a shocked council. Five-digit
expenses were made and not accounted for in the budget. Contracts the city had
entered into were not being paid. Mistakes in the bank reconciliations trailed
back to 2004.

Since then, three staff positions have been
eliminated: the assistant finance director, the assistant city recorder, and the
assistant to the police chief. The cuts generated about $130,000, Barnes said -- not nearly
enough to close the gap.

Barnes said the city will consider additional cuts by the end of the year. She will present a supplemental budget to council on April 4.